Hedge Vs. Wedge: Alexa, CES and The Difference Between Amazon and Apple Smart Home Strategies

The early consensus coming out of CES is that Amazon Alexa was the star of the show. Not only did the virtual assistant technology and its physical manifestation in Echo dislodge Nest as the sexy integration partner that everyone clamors to put in their press release and on their consumer packaging, but you could sense a palpable excitement on the show floor about the potential of the voice-powered virtual assistant. 

And while some blogs seemed to hint that Alexa's star turn at CES 2016 was a surprise, anyone who reads the Smart Home Weekly or listens to the Smart Home Show probably saw it coming, as I've written quite a bit about how Amazon was the smart home story of past year. This year's CES only put an exclamation point on Alexa's fast success.

Still,while most of the CES coverage pointed to Alexa as the stealthy star of the show, Amazon's voice-based AI is only part of the Amazon smart home story. An important and disruptive one to be sure, in large part because Alexa is the most visible face of the smart home industry's early shift towards natural language processing as the next-gen interface, but Amazon's AI platform on its own doesn't capture Amazon's full smart home vision which, when fully articulated, is pretty fascinating. 

Here are the other strategic pillars of Amazon's smart home strategy:

DRS: Dash Replenishment Service (DRS) is just as interesting and strategic as Alexa, and while it wasn't as pervasive at CES this year as its AI brethren, the integration of DRS into a new line of Whirlpool appliances is still a huge deal. And with the National Kitchen and Bath Association's big show coming in a few weeks to Vegas, I expect we may not even be done with big announcements for DRS this month.

Amazon Home Services. While I think August had the most interesting announcement of the past 12 months in the smart home service platform space with August Access (a concierge services platform centered around the connected front door), Amazon's push into creating a marketplace for home service providers was no doubt the biggest news in this space. With this initiative, Amazon started to offer home services as add-ons directly into the shopping cart flow for devices like a connected thermostat; imagine buying 'one thermostat install' for $100, as an example, with your purchase of a Nest or Ecobee. These types of installation services might only be the start, as one could imagine coupling offerings like lawn care services to the purchase of a connected irrigation system or security monitoring to a connected camera. 

Amazon Home Automation Store. While almost an afterthought at this point compared to the more exciting aspects of Amazon's smart home strategy such as Alexa and DRS, it's hard to overemphasize just how important Amazon as a sales channel is for smart home products. Amazon is, by a wide margin, the biggest online channel for DIY smart home products today, and probably moves more volume in smart home products than the top couple brick and mortar retailers combined. And even as the company gives its own products like Echo an unfair advantage through front page promotion and heavy discounting through Prime, the company's home automation store does a pretty good job of pushing product of other companies too. One smart home company CEO told me at CES that 2015 was the year he realized just how crucial Amazon is as a channel for his product. Basically, he said, the majority of his sales come through the online retailer. 

Hedge Vs. Wedge: What Does All This Mean?

Taken together, Amazon's smart home strategic pillars are fascinating and compare well to a company like Apple, who seems to be almost be treating the smart home as an afterthought. As I've said before, while I think Apple will be successful long term with its smart home framework, HomeKit still has the feel of a market hedge, one that Apple is making just in case this whole smart home thing becomes a big deal.

Amazon, on the other hand, seems to be going all in, making a huge bet on what I would describe as a competitive wedge strategy. Essentially they're wedging their way into the market by taking over the interface layer with Alexa, laying a strong foundation to ultimately build a commerce and services business (where most of the long term money is) on top of the control and network layer that Apple (and Google) have focused on.

Like I said, hedge vs. wedge.

Not sure what I mean here? That's ok, I've created a couple super advanced visualizations (i.e. Powerpoint Graphics) to illustrate my point. 

First, the graphic below shows what I'll call the smart home "market stack".* Each layer represents an area of business opportunity and common entry points for companies who are, in some way, competing in this market. 

*(The network and OSI model nerds out there might suggest my graphic isn't true to the network model, which is fine since all I'm doing is showing how I visualize the market and the opportunity "layers".) 

 Figure 1: The Smart Home "Market Stack"

The graphic is really pretty self-explanatory. For those of you who study technology market evolution, you'll probably also notice that, like most technology markets, the core technologies are the most mature at this stage. This includes network technology like Z-Wave or Bluetooth, as well as smart home control technology such as HomeKit, Works With Nest or SmartThings. These two layers basically represent the technology core of traditional "DIY smart home" products. Amazon starts to assert itself above this, in what I call would describe as the interface, services and commerce layers, essentially wedging itself in through an interface (Alexa) and commerce platform (DRS).  

What does this Amazon wedge look like? See figure 2.

 Figure 2: Smart Home Stack, Market Opportunity and Amazon Wedge Strategy


If you read the narrative guide on the right in sequential order 1-5, you'll see that the smart home market is most mature around the core technologies (1), and how Apple and Google went after the control layer of the market (2) by leveraging their core strengths (mobile OS ecosystems) and new ones they've acquired (Nest) and others they've been slowly developing (Apple TV). 

Amazon decided at some point not to wrestle with these giants, but instead to go after the next-gen control interface in voice/natural language processing and, as stated previously, wedge their way into the market. This allowed them to appeal to the consumer with something completely different from traditional touch screen and tactile interfaces and leapfrog other voice virtual assistants like Siri, Google and Microsoft (Cortana). At the same time, Amazon can use Alexa to 'control the control layer' where Apple and Google play, enabling Amazon to layer commerce and services above that (4 and 5) where the most long-term money is. 

It should be noted these visualizations are one dimensional and don't do complete justice to the complexities of the market. As an example, premium managed smart home service providers like Vivint are happy to work with Amazon since, ultimately, their value comes from a comprehensive package of installation, support and monitoring services packaged around a smart home, an infrastructure heavy approach that Amazon is not likely to ever replicate.

Bottom line, Amazon fully realizes the larger market opportunity over time in smart home is in connected services and commerce. Through a multi-prong technology and business model approach they've created an innovative wedge strategy that, for the time being at least, has them outmaneuvering Apple in the race to monetize the smart home.

We'll have to see if the same is true by CES 2017. 

Keep tuned for our 2016 smart home outlook. Subscribe here to be notified of its publication and to get the Smart Home Weekly by email. 


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